GUT: This Will Not End Well

May 15, 2020 10:28 AM ETGabelli Utility Trust (GUT)29 Comments

Summary

  • GUT is trading at a whopping 84.2% premium to NAV.
  • No fund warrants such a premium.
  • Investors should strongly consider selling their shares.

This will be a short article.

The Gabelli Utility Trust (NYSE:GUT), a leveraged CEF investing in U.S. and international utilities, is currently trading at a whopping 84.2% premium to NAV.

It is the highest premium in GUT's entire history and by quite a margin. The fund has only traded somewhat close to these levels during a couple of days in June of 2009 and January of 2010, and the premiums didn't last long:

(Source: Cefconnect)

GUT's premium is also highest in the entire CEF space, and it is not even remotely close. Consider the 10 CEFs with the highest premiums:

(Source: Cefconnect - chart by author)

As can be seen above, GUT's premium is more than three times as large as that of its closest peer, the DNP Select Income Fund (DNP), and no other fund has a premium greater than even 30%. GUT is really on a class of its own.

Excessive premiums are detrimental to shareholders for three key reasons.

First is the fact that excessive premiums can cause significant underperformance and shareholder losses when these narrow. As a quick example, GUT's shareholders suffered losses in excess of 20% during 2010, as the fund entered the year with a +70% premium to NAV. Losses were exclusively due to narrowing premiums, as NAV returns were outstanding at 18.19%:

ChartData by YCharts

In my opinion, GUT's shareholders are going to experience double-digit losses when, not if, premiums narrow to more reasonable levels. Management seems to agree:

The Fund’s shares are currently trading at a premium to net asset value. The Board of Trustees believes that the premium at which the Fund shares trade relative to net asset value is not likely to be sustainable. Shareholders participating in the Fund’s dividend reinvestment plan should note that at the current market price, the

ChartData by YCharts

ChartData by YCharts

ChartData by YCharts
ChartData by YCharts

ChartData by YCharts

This article was written by

Juan de la Hoz profile picture
8.02K Followers
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He focuses on dividend, bond, and income funds, with a strong focus on ETFs, and enjoys researching strategies for income investors to increase their returns while lowering risk.

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I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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